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This is Not a Typo

By: Cary Weiner

Conventional wisdom in the energy world says that energy conservation should come first, followed by energy efficiency, and then renewable energy. The analogy used in the industry is to eat your efficiency vegetables before your renewables dessert. If you’re like me, you’ve heard this phrase so many times from so many reputable sources that it has become almost impossible to question. But with the cost of solar falling and the cost of natural gas so low, I thought it couldn’t hurt to take a peek into the financial reality behind this widely accepted admonition.

First, let’s make sure we’re on the same page about the terms ‘conservation’ and ‘efficiency’. Energy conservation refers to saving energy through behavior. Examples include turning off lights, taking shorter showers, using window shades to block out summer heat, and running the dishwasher only when full. Energy efficiency refers to providing a given energy service using as little energy as possible. An example is providing 800 lumens of light with a 60-watt incandescent, a 13-watt compact fluorescent, or a 9-watt LED.

Now I don’t think anyone can argue that conservation shouldn’t come first. This really is the lowest of the low-hanging fruit and it comes at no cost. Argument over.

But what about efficiency before renewables? (In this case I’m holding up solar electric (PV) as the representative for renewables.) Replacing incandescent light bulbs with LED is a financial no-brainer at this point. But what about replacing CFLs with LEDs – is the financial payback really there? About 75% of Colorado households heat their homes with natural gas – how does adding insulation stack up against solar PV from a financial perspective? Let’s look at some sample payback periods using rough cost, incentive, and savings estimates for typical Colorado households*:

energy conservation efforts and payback time

What we see is that solar PV has a quicker payback period than adding insulation or upgrading one’s furnace for homes heated with natural gas. Of course payback period is only one measure of financial attractiveness. Net present value can be used to estimate the total value of an investment over a specified time period in today’s dollars. Modified internal rate of return reflects cash flows over a specified time period as well as rates for interest and reinvestment of earnings. These indicators can be used as alternatives or complements to payback period.

financial returns on common energy measures

As you can see, solar PV has the highest NPV (due in part to it being the largest investment). And despite solar PV having a longer payback period than replacing CFLs with LEDs, it has a slightly higher MIRR compared to that measure.

It is important to note that reducing your electricity use as much as possible before going solar means you’ll need a smaller PV system to offset your consumption. This can be cost-effective in and of itself. But in general, tread carefully when weighing investments in efficiency and renewables, especially if you use natural gas to heat your home. It really depends on the specific measure in question, one’s financial goals, and other considerations such as comfort, performance, and desired environmental impact.

Maybe you can have your renewables cake and eat it, too.

*Assumptions include:

  • Current electricity cost of $0.10/kilowatt-hour
  • Current natural gas cost of $0.60/therm
  • 5% annual increases in electricity and natural gas prices
  • $3/watt installed solar cost
  • ~$1,500 utility incentive for solar
  • $500 combined tax credit/utility incentive for insulation and furnace upgrade
  • 5% interest/reinvestment rate